Nineteen ninety-nine in retrospect proved to be one of the most devastating years for the entire post-acute-care industry," says Andrew Gitkin, a New York-based healthcare analyst for PaineWebber.
"Just when you thought you got the worst of it behind you, it always seemed to get worse," he says.
That sentiment is widespread in today's post-acute-care industry. Providers have seen their Medicare revenues decline steadily since 1997, when the federal Balanced Budget Act mandated payment changes for post-acute care.
For most nursing homes, 1999 was the first full year of Medicare's new prospective payment system, which cut payments to skilled-nursing facilities by as much as $2 billion, according to industry estimates.
This year an unprecedented number of large nursing home chains have sought protection in bankruptcy court.
In home health, 1999 marked the second year of the Medicare interim payment system, which was expected to cut about $16 billion from the federal home health tab over five years. However, current government estimates of the cuts amount to about $48 billion.
Some 2,500 home health agencies, many of them hospital-based, have closed their doors since the interim payment system began.
But the changes of 1999, however dramatic, didn't come suddenly.
Survey tracks reform's impact. To put this year's events in historical context, MODERN HEALTHCARE asked operators of two or more post-acute-care facilities about their size and financial status in 1997-when Medicare reform had been legislated but for the most part had not been implemented-and 1998, when the payment changes started to take effect.
Survey respondents include many of the industry's largest players. What emerges is a map of where the industry stood as it headed into 1999.
The survey was not a random sample, so results cannot be extrapolated to the entire industry. Some sectors, notably assisted living, did not include several large players that might have changed the picture considerably. They include Assisted Living Concepts, Emeritus Assisted Living and Sunrise Assisted Living.
In addition, survey responses are self-reported and have not been independently verified.
Despite these limitations, the survey does provide a snapshot of an industry already beginning a decline that would only steepen in 1999.
Overall, revenues among reporting companies grew 19% from 1997 to 1998.
But the growth was inconsistent throughout the sector.
Home health revenues shrank, reflecting lower Medicare payments under the interim payment system, which went into effect in October 1997.
Revenues for other sectors rose, with the largest gain in assisted living. Assisted-living growth is independent of Medicare changes, because the industry relies almost entirely on private-pay residents.
Carolyn Markey, president and chief executive officer of the Boston-based Visiting Nurse Associations of America, says she wasn't surprised by the decline in home health.
Since October 1997, when the first home health agencies switched to the interim payment system, 15 visiting nurse associations have closed, and four have stopped participating in Medicare, she says.
Changes to Medicare policies included in the fiscal 2000 budget law signed by President Clinton earlier this month give home health agencies a reprieve from a further 15% cut that had been set for next year. The cut now won't go into effect for at least two years.
More lasting relief for the industry may be in sight, as HCFA prepares to complete regulations for a permanent PPS. Proposed regulations were published this fall.
The new system, which adjusts payments according to patient needs, is slated to take effect in October 2000.
Reversal of fortune. Survey responses showed that the large publicly traded nursing home chains experienced the largest downturn in financial fortunes.
For the 12 publicly traded respondents, the average profit of $37.3 million per company in 1997 fell to an average loss of $147.5 million per company in 1998.
Many of these companies had borrowed heavily to fund expansion, counting on Medicare payments to keep cash flow strong. When Medicare payments fell off, some could no longer make good on their debt.
Among companies filing for bankruptcy in 1999 were Louisville, Ky.-based Vencor and Albuquerque-based Sun Healthcare.
Two other large chains, Atlanta-based Mariner Post-Acute Network and Sparks, Md.-based Integrated Health Services, have defaulted on interest payments and are in discussions with their lenders about financial reorganization.
For the 10 private for-profit skilled-nursing companies responding with complete financial information, average per company profit fell 66% to $1.8 million from $5.3 million.
Not-for-profits, by contrast, made gains, with an average 10% growth in net income, to $8 million from $7.3 million.
Some not-for-profits did report improved Medicare rates under the PPS, as did some private companies.
But survey results may reflect a peculiarity of the particular not-for-profits that responded: Several derive much of their income from retirement homes and other business lines that have not been affected by Medicare policy changes.
Doug Howell, management analyst for American Baptist Homes of the West, says cumulative bottom-line figures probably don't show the full extent of the PPS' harm to not-for-profits. During its three-year phase-in, the PPS bases payments partly on a facility's 1995 costs. Companies with high costs in the base year receive somewhat higher payments under the PPS. Those with low costs in 1995 receive less.
"On a typical Medicare day we probably took a more sizable hit precisely because (in 1995) we weren't doing a great job of capturing our costs," Howell says.
But many not-for-profits, including American Baptist, traditionally take patients with fewer medical needs who are less likely to have Medicare-covered stays, so even a steep drop in Medicare payments wouldn't necessarily appear in the bottom line.
Outpatient reshuffling. Birmingham, Ala.-based HealthSouth Corp. continues to tower over other providers of outpatient care, with a total of 1,549 sites, excluding its 125 rehabilitation hospitals.
The company's dramatic 86% decline in net income resulted largely from a charge because it discontinued its home health business after profitability fell in the wake of the interim payment system.
Of note in the outpatient part of the survey, in 1998 Mechanicsburg, Pa.-based Select Medical Corp.'s 116 clinics made it a distant fifth among respondents.
But with the acquisition of 623 clinics from Novacare for $200 million this year, privately held Select Medical has moved up to the No. 2 spot.
Also, net income of rehabilitation hospitals responding to the survey stayed flat or dipped in 1998, largely reflecting lower revenues from Medicare and managed care.
The post-acute-care industry will receive some $2.7 billion in givebacks over five years from the fiscal 2000 budget, which rolled back Medicare policies for all healthcare providers.
Under the new budget law, facilities can move immediately to the federal payment rate, which will benefit facilities that treat sicker patients today than they did in 1995.
A temporary 20% increase in payments for certain high-acuity patients is scheduled to be replaced by a smaller increase for all patient categories next year. The legislation also created a two-year moratorium on the $3,000 cap on therapy payments for patients in nursing homes.
Medicare will now pay separately for several extremely costly services and items, including ambulance services, chemotherapy and prosthetics.
The legislation was a turning point for the industry, Gitkin says, because it marked the government's admission that it had gone too far in cutting payments to providers of healthcare, including post-acute care.
But Gitkin says that for skilled-nursing facilities, it was "more of a public-company bill than a private-company bill," because public companies tend to rely so heavily on Medicare revenues.
But some private companies welcome the changes.
Floyd Schlossberg, CEO of for-profit Alden Management Services, a Chicago-based long-term-care provider, says he will apply to immediately change his 20 skilled-nursing facilities to the higher federal rate.
Howell, who says that eight of American Baptist's 10 skilled-nursing facilities would also benefit by bypassing the PPS phase-in, predicts that the lifting of therapy caps will improve the health of residents more than anything.
Still, many industry watchers are plainly skeptical of the givebacks. "The industry was looking for a life preserver," Advest analyst Rob Mains says of the new legislation. "This is driftwood."